Hedging Strategy and Electricity Contract Engineering - IFOR

7.6 Summary 187
2500
2000
Dispatch [MW]
1500
1000
500
0
−500
100
80
60
Spotprice [CHF/MWh]
40
20
0
0
500
2000
1500
1000
Demand [MW]
2500
3000
Fig. 7.9: Optimal dispatch for a risk constraint of 2 million CHF.
When the risk constraint is strengthened from 2 million to 0 and -5.6 million
CHF respectively the strategy becomes more concerned in dealing with the
volume risk, as seen in Figure 7.10 and 7.11. The dispatch is now responding
not only to the spot price, but also to the swing option demand, by producing
more when the demand increases. Consequently the dispatch strategy tries
to avoid a large spot position in the case of a peak in demand by producing.
Obviously, the high immediate payoff that production would cause in the case
of high prices is lower than the value of leaving that water in the dam to meet a
future potential demand spike. No pumping is conducted.
7.6. Summary
The optimal portfolio copes with risk in two ways. When the risk constraint
gets tighter the contract portfolio reacts by decreasing the spot position. At the
same time the production portfolio manages the risk constraint by decreasing
the volume risk through a dispatch strategy that matches demand spikes.
The fact that dispatch so heavily depends on the swing option demand is a
verification that a simultaneous optimization of the contract portfolio and the
production portfolio has to be conducted.